Constituents of Gross InterestGross interest consist of the following elements:
1. Insurance Against Risk
A creditor knows by his experience that some of his debtor will not repay. Thus he sees a risk in lending. This lose which is likely to be faced by this non-payment is equally distributed over the debtors which are not going to fail in making payment s back. Thus good debtors have to pay for the bad once. Every debtor is good debtor is charged a certain percentage as an insurance against risk.
2. Return for Inconvenience
The inconvenience to the lender is mainly of two types
a. He may have to borrow money and pay interest himself when he would need money in some future time.
b. He may get money back when he may not find some lucrative place to invest it and so his money may remain idol and suffer loss.
In order to avoid the above two situations the creditor often charge something extra over and above pure interest.
3. Wages of Management
The creditors do a lot of work for their money lending business. They have to keep accounts, frequently visit the debtors reminding them about the loans etc. It seems to be their whole time job. Similarly in this business they would have lost the chance of making money by doing something else. This lose also has to be borne by the creditor.